Woolworths chief executive Brad Banducci says growing competition has destroyed the supermarket duopoly it enjoyed with rival Coles, and the sector's world-leading profit margins.
But he warned that soaring electricity prices were a "material issue" and will lead to higher prices on the shelves. Electricity is Woolworths' third largest cost, behind labour and rent.
"We manage what we can manage with energy efficiency. But given the cost increases that are coming through right now, we are trying to outrun a bear, but I am not sure we can," Mr Banducci said.
"We will have to in some way, very cautiously and carefully, pass those through to our customers, unfortunately."
Woolworths until recent years had the highest supermarket profit margins in the world, and the competition tsar Rod Sims has described Woolworths and Coles a "very cosy duopoly." Former Aldi executive Paul Foley once described the pair's high profits as "really like waving a flag saying, 'Come here'."
But Woolworths had spent more than $1 billion on cutting prices in recent years. Mr Banducci said Woolworths and Coles had just 60 per cent of Australia's packaged food market and the fat margins were gone. German discounter Aldi had about 10 to 12 per cent market share, he said.
Foreign retailers were attracted to Australia for many reasons, he said.
"It's a very stable, balanced, growing economy. The fact that we have great population growth for the food business makes it a naturally attractive market."
Mr Banducci said he wanted Woolworths to reduce the percentage of items sold on special to just 30 per cent, and especially reduce discounting on every day items such as bread.
He also told a News Corp conference in Melbourne that it "broke" his heart that some products on supermarket shelves were bought for export, such as baby formula, meaning Woolworths' "core shoppers" missed out. "It's very hard," he said. "We're working through it."
One year into the top job, Mr Banducci said Woolworths had no plans to sell its stellar liquor business, Dan Murphy's, or its underperforming discount department store chain, Big W. It needed to do a better job of selling everyday goods to average Australians he said.
And Mr Banducci said Woolworths - which once advertised itself as "the fresh food people" - wanted to better promote health products in its stores and make organic products more affordable for the average person.
Berries, bananas and avocados are the supermarket's biggest sellers, he said.
